"We will not use public instruments to solve problems of a private nature,” Portugal’s prime minister said. “Taxpayers will not be called to pay for losses at private companies. When private companies do bad business they have to bear the costs."
Photo: AFP

by
Sergio Goncalves and Laura Noonan

Portugal's government and central bank assured investors on Friday that the southern European country's financial system was sound, aiming to quell worry about the spillover effects of trouble at the Espirito Santo business empire.

"It is important that Portuguese and foreign investors ... remain calm about the bank and our financial and banking system," Portuguese Prime Minister Pedro Passos Coelho told reporters in Lisbon.

Recent disclosures of financial irregularities at a web of family-held holding companies behind Portugal's largest listed bank, Banco Espirito Santo, have raised questions about potentially destabilising losses at the bank and other companies in the family's orbit. That worry sparked a rout in global markets on Thursday, pushing up bond yields and reviving memories of the region's debt crisis: Some European companies even abandoned long-planned fundraising operations.

In a statement late on Thursday night, BES insisted that any losses relating to the bank's €1.15 billion exposure to Espirito Santo holdings would not put it at risk. The bank said it had €2.1 billion in capital above minimum regulatory requirements as of March 31, taking into account a further 1 billion raised via a June share sale.

Shorting ban extended into next week

The statement partially steadied market jitters on Friday in Portugal and beyond. European markets edged higher and Italy paid record low yields at an auction, shrugging off fears that had weighed on the sovereign debt markets earlier in the week.

Portugal's PSI index closed up 0.6 per cent. BES shares opened up 11 per cent when trading resumed after a suspension, though the stock then seesawed, closing down 5.5 per cent, despite a ban on short selling in the stock.

Portugal's CMVM market regulator said on Friday it had extended this "shorting" ban on BES shares for two more days.

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Moody's Investors Service said it had cut the long-term debt ratings of BES to B3 from Ba3 and the long-term deposit ratings to B2 from Ba3, and it was on review for downgrade.

The ratings agency said the downgrade "reflects Moody's concerns regarding BES's creditworthiness that are heightened by the lack of transparency on the ring-fencing of BES against any troubles emerging from its holding company Espirito Santo Financial Group (ESFG) or any other group entity".

An audit found a "serious financial condition" at Espirito Santo International SA - a vast conglomerate with holdings in banks, hotels and healthcare which is near the top of the family business pyramid.

ESFG later said ESI had overvalued its assets and failed to recognise losses and debts, but the reasons it got into such a financial mess are unclear. Investors are also in the dark about the size of any potential losses.

And while BES gave the most detailed breakdown yet of its exposure to other Espirito Santo group companies, the bank said it could not assess the potential losses until a restructuring had taken place at its largest shareholder ESFG, and at other family holdings under the ESI umbrella.

Asset sales, yes; public money, no

That restructuring plan is not finished yet, but could be announced as early next week, according to a person with knowledge of the operation. It is likely to include swapping some of the debt issued by ESI and Rio Forte into equity in those companies, as well as pushing out repayment dates on other debt.

Some non-financial assets, including the Tivoli hotel chain in Portugal and Brazil, could also be sold.

"We welcome the additional visibility provided with yesterday's release on the group's exposures ... though there was no clarification on whether there are provisions made on these exposure," BPI analyst Carlos Peixoto said.

Speaking to reporters in the morning, Prime Minister Passos Coelho said investors needed to differentiate between the Espirito Santo family and BES, the lender.

"BES is a separate case from the businesses of the Espirito Santo family ... It is important that Portuguese and foreign investors understand that difference," he said.

Passos Coelho later ruled out the state stepping in to help the Espirito Santo empire. "We will not use public instruments to solve problems of a private nature. Taxpayers will not be called to pay for losses at private companies. When private companies do bad business they have to bear the costs," he said.